InvestmentHouse Weekend Update:
investmenthouse.com
- Stocks surge to a DJ30 breakout as investors like even Citigroup's loss.
- Bond yields jump, dollar firms, gold plunges: what the markets outside stocks are telling you.
- Price surges to come: how the government tied food prices to energy prices and how we are all going to pay the price.
- NASDAQ, SP500 breakout will confirm a continued rally near term.
Earnings provide the trigger for a breakout in many areas.
After a pitiful start that led to a deeper pullback from the rally, a pullback that left investors uncomfortable enough to wonder if the rally could continue, earnings started to come through this past week. INTC, IBM, JPM, GOOG, CAT and HON all posted earnings and guidance that showed a stronger future than the general mood of the market was giving the economy credit for. Even misses by SLB and C were viewed in favorable light, indicating that the build off the lows with leadership and good price/volume action underpinning the move, as well as other factors at work as discussed below, are driving prices higher despite the concern about the US economy. This could very well be just a relief move in a larger bear market, but for now there are a lot of good stocks in good patterns making solid advances. Hard to argue with that regardless of what is driving it.
Stocks gapped higher on the earnings, fought off an early selling attempt, and rallied to new session highs in the afternoon. It was expiration and in the afternoon the market sagged as some expiration reshuffling occurred given the strong market recovery in the second half of the week. That pullback kept NASDAQ and SP500 from taking out their early February highs, but they did clear some important resistance milestones on the Friday move. DJ30, following the breakout Wednesday by the Dow Transports (DJ20), broke out as well, as it broke a hole in that ceiling at 12,750, doing so on stronger, above average volume. NASDAQ showed solid above average trade on its break higher as well, the first above average trade in a month.
TECHNICALLY the action built upon the improved market condition since the March low. More volume, more leader breakouts, clearing resistance. Stocks started the session higher and closed higher. The late fade was nothing major; just some repositioning at expiration after a surge on the week that not many anticipated. After the Monday aftermath of the GE earnings, the indices showed good intraday action the rest of the week.
INTERNALS: Another solid showing on an upside day. Similar to price/volume action, the internals have turned nicely with solid advances on the upside sessions and modest decliners on the downside. Friday NYSE posted a 3.6:1 reading and NASDAQ a 2.6:1 showing. Not bad at all even with the afternoon fade off the highs. Volume was better with NASDAQ and DJ30 posting above average sessions. It was April expiration, however, so you would expect volume to be up. Given that, volume was still light in the big picture as NASDAQ just cracked average and NYSE didn't quite make it that far. Thus volume, even with the much better price/volume action (up on up days, lower on down days, showing overall accumulation of shares), it is not a hands down, landslide upside victory.
CHARTS: Some key breaks over resistance as DJ30 took out its 12,750 nemesis, following the Dow Transports higher. That is a Dow Theory upside indicator. NASDAQ and SP500 were not quite as sweeping in their moves. NASDAQ cleared the April high, making a second higher high on this upside move (sweet), taking out the August intraday low (sweet as well), but just missing taking out the early February peak that is thus far the high point on the bounce off the January low (that would have been very sweet). Still a nice move. SP500 cleared the early April high as well, the late February peak, and the August intraday low, but it faded back from the early February peak on the close. Still a very sweet move as it too made that next higher high off of the low, building back up from the selling.
LEADERSHIP: The move spread out with this last break higher. Sure agriculture, energy and metals were solid (though metals had to come back from lower opens thanks to the stronger dollar), but so were large cap techs and tech in general. Transports resumed their run after waffling the prior week and early last week on the UPS miss. Truckers, shippers, rails and air transport are all moving together. Chemicals enjoyed a good week as did heavy machinery and large-scale construction services. Looks as if the worldwide growth story trade, after the hiccup on the credit and mortgage crisis, is saddled up and riding the range again.
THE ECONOMY
Has the financial crisis and associated financial market slump ended?
At the end of 2007 I wrote about how financial crises can get out of control if quick action isn't taken. The Fed reacted initially, but then when the credit markets froze up it hesitated, the markets lost confidence, and the financial issues quickly ran out of control. We all saw how in the first quarter the scare took over and BSC, solvent just a week earlier, was victimized by a run on the bank so to speak. Unable to do business it was effectively bankrupt and was taken out with a Fed assist.
I also wrote that a financial crisis leading to a quick bear market in stocks could be fast and the economic ramifications shallow. In 1998 there was a financial crisis that induced a bear market, but the Fed helped support foreign currencies and the crisis was over rather quickly (14 weeks from peak to recovery). How long has this one lasted? A bit longer, about 26 weeks from the August peak, but 14 weeks from the first low to the breakout this week. There is a bit more involved in this one with the mortgage issues, but those are what led to the financial problems as the mortgage contagion spread across the oceans.
Ironically, it was the Fed's action with respect to BSC as well as its opening the discount window to non-primary dealers, and jumping the size and content of its auctions that finally appears to have put the financial crisis genie back in the bottle. First it showed the markets that the Fed stood ready to backstop the crisis. Second, it showed that the Fed was not the Greenspan Fed, i.e. meeting any financial issues with predictable rate cut after rate cut. Instead, this Fed was thinking outside the box, looking at how to provide liquidity without resorting to endless rate cuts and associated dollar liquidation. The market got the message and the dollar stopped its decline. It did not suddenly rebound; the administration won't come to its aid and thus do that trick. It has, however, spent the past 5 weeks moving laterally in a base.
Bonds are another indication. Bond yields jumped, particularly in the short end. From a holding pattern at 1.8% they closed Friday at 2.13% after hitting over 2.2% intraday. The 10 year rose from 3.4% to over 3.8% Friday before settling at 3.71%. Breakouts on both, particularly on the short end. As discussed Thursday, this can be some inflation indication, but higher rates in themselves are not inflation. With the Fed indicating it can fight the fire without endless rate cuts, the dollar has firmed as noted and that, despite the export junkies, means a better economic outlook for the US. Bond yields reflect economic strength, and rising yields historically indicate a firming economy.
Gold is also showing the Fed has written a prescription for the right medicine. Gold peaked in mid-March. It gave up 15% off the peak, bounced, but then gapped lower Friday, falling 28 clicks. It is at a critical point just over 900. It looks to be on the ropes. Falling gold indicates the recession and inflation trade is winding down. The Fed is not going to cut rates with abandon, and thus the easy inflation play in gold is over.
All of this points to the potential that the credit crisis and associated economic slowdown are winding down. The stock market bounce and leadership are a good leading indication but not totally conclusive in themselves. The action in bonds, the dollar and gold add weight to the favorable story, but even those are not conclusive as the dollar is still basing and gold has not broken down completely. The next few weeks will tell more of that story.
There is a rub; there always is. LIBOR (London Interbank Offered Rate) rate spreads are on the rise once more. These are the rates banks are willing to loan to one another, and when the spreads are high that means they are worried and don't want to lend. At the start of the credit freeze they were at 90+ points. Then after the Fed actions they fell back to a reasonable 5 to 10 points. Now they are back up to 94 basis points even as things look better economically. This means that borrowing costs are higher than banks are indicating and could mean profit impacts yet undisclosed.
The strange thing about this is that banks are not flocking to the Fed auctions. Indeed, the participation has declined, indicating that liquidity levels are improving and quite livable. If they were unable to access funds they would be coming to the Fed.
In any event, in the current market as long as leading stocks and the indices show the right kind of action, that is enough for us to make money off the moves.
So you think prices are bad now?
Friday we heard from the Lundberg survey that gasoline price are going to hit $3.60 nationally over the next few weeks. Over the past couple of weeks they jumped almost 20 cents. By summer $4/gallon gasoline is expected. Last summer it was $3.
Yes the ethanol program has really put a dent in the rising price of fuel. More than that, it has caused more wild areas to be plowed up, destroying more wildlife habitat at the fringe of farmland, and polluting streams with fertilizer runoff and sediment as land is planted right up to water's edge. With 1700 gallons of water used to produce every gallon of ethanol, precious water resources are getting squandered for no apparent gain. Great environmental impacts.
Food prices are soaring as a result. As noted in the CPI and PPI, animal feed costs are exploding. That is causing price increase on top of a price increase. How? Food costs are up because corn is being diverted to ethanol. Corn syrup is the basis for our food just as rice is the basis of the Asian diet. More corn going to fuel means less for the food table and thus higher prices. Indeed, high prices are causing food riots around the world and yet we are burning it in our fuel tanks as people have shortages. CAT's CEO wondered at the folly of this Friday in an CNBC interview.
But just higher prices for corn based foods are not the only issue. Feed corn is higher, so much so that ranchers are slaughtering cattle and chickens so they don't have to buy the high-priced feed in a losing proposition as it costs too much to raise the animals. Thus in several months we are going to have shortages of beef and poultry. We are hearing prices of $8/lb for ground beef.
Foolishly the government has once more blundered into market manipulation with ill-conceived policies that have devastating effects on the US and other world consumers. It has tied food prices to energy prices with its ethanol policy, and runaway energy prices are dragging food with it. When I discussed this with one of my senator's staffers who handles energy issues, he was clueless, saying there had to be a start somewhere. Yes, but history shows failure after failure when the government picks the method of solving a problem rather than providing incentives for anyone to find the best solution. Give people the incentive and they will find the best solution. When the government picks the solution the only ones benefitting are those who basically receive the government monopoly. This one is on corn, our main food source. Good move. We need to undo this decision yesterday or we are going to see a price explosion in food, and that is going to escalate unrest across the globe at a time that we simply don't have the resources to meet it. That plays right into the hands of our enemies.
THE MARKET
MARKET SENTIMENT
VIX: 20.13; -0.24. VIX plummeted when it was clear the Fed was in the game for keeps. It broke lower again on the rally this past week. If you only watch the VIX and assume the relationship to the indices remains constant, you were thrown an exploding slider and whiffed badly. The Fed changed the game and broke the relationship. It is now not worth watching VIX until it sets up some sort of correlation once more.
VXN: 23.58; -0.62
VXO: 20.74; -1.41
Put/Call Ratio (CBOE): 0.82; -0.12. First significant slide below 1.0 in over a month. Doesn't mean a whole lot, however, as it is just a few sessions below that level after 4 weeks of closes over 1.0.
Bulls: 37.8%. Barely budged up as the market faded last week, up from 37.4%. Fell to 30.9% in mid-March. The indicator did its job with the dive below 35% and the crossover with the bears. They remain in crossover mode even with the rise in bulls as bears edged higher yet again. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 38.9%, up a fraction from 38.5% and 37.5% the week before as the bears are still skeptical of a potential bottom in the market. Heading back up toward the 44.7% peak, but not likely to make it there of course. Still pessimistic even as the indices form up a bottom and leadership improves. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past the range that means business. Big move after falling to a low of 19.6% on this round. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: +61.14 points (+2.61%) to close at 2402.97
Volume: 2.145B (+17.58%). Above average for the first time in a month, but barely and on expiration at that. Good but not clear and convincing. Never seems to be does it?
Up Volume: 1.85B (+1.133B)
Down Volume: 371.905M (-714.631M)
A/D and Hi/Lo: Advancers led 2.61 to 1
Previous Session: Decliners led 1.47 to 1
New Highs: 79 (+30)
New Lows: 84 (-22)
NASDAQ CHART: Click to view the chart
Gapped higher over the 90 day SMA, the April peak, the late February highs, but stalled at the early February peak (2420). Still an impressive move as it broke from its base off the January and March lows.
NASDAQ 100 (+3.23%) with GOOG, AAPL and RIMM leading, broke to a new post low high on above average volume. It was the strongest of the tech indices, and it showed that on Friday. Very nice and the next test is up near 1950 with some summer 2007 peaks and the 200 day SMA.
NASDAQ 100 CHART: Click to view the chart
SOX (+2.46%) cleared the April highs but could not break the early February peak. Solid move and has an opening up to 400 (closed at 377).
SOX CHART: Click to view the chart
SP500/NYSE
Stats: +24.77 points (+1.81%) to close at 1390.33
NYSE Volume: 1.477B (+20.23%). Volume was the best since the start of April, but it still could not crack average.
Up Volume: 1.181B (+551.756M)
Down Volume: 282.564M (-302.858M)
A/D and Hi/Lo: Advancers led 3.59 to 1. Very solid as the NYSE indices extended the rally off the lows.
Previous Session: Advancers led 1.03 to 1
New Highs: 137 (+16)
New Lows: 68 (-8)
SP500 CHART: Click to view the chart
Cleared the late February and early April peaks on rising trade. Stalled out at the early February peak, the high point off of the January low. Good break higher, but still has some gains to log to make a clearer break a la DJ30 or NASDAQ 100.
SP600 (+1.76%) is lagging, rallying up to the late February and early April highs but stalling there. A good move but it is definitely following the lead of the other indices.
SP600 CHART: Click to view the chart
DJ30
Along with NASDAQ 100, this was the move of significance on Friday. The blue chips cleared all of the highs since the January and March lows, moving past that key resistance at 12,750 on rising, above average volume, the best in over a month. This was the move the blues had to make, and next resistance is at 13,095 where the 200 day SMA resides along with the December 2007 low.
Stats: +228.87 points (+1.81%) to close at 12849.36
Volume: 304M shares Friday versus 216M shares Thursday. Best volume in a month though still well below the trade seen in mid-March when DJ30 put in that second bottom and bounced.
DJ30 CHART: Click to view the chart
MONDAY
Earnings season is in full bloom and the market will be its usual 'what have you done lately for me' self, breakout or no breakout this past week. In other words, it will be looking for some more good earnings and guidance to push the breakout and break SP500 and NASDAQ over the early February highs.
To do that it will also look for guidance from the leaders that are emerging once more to assist the energy, agriculture and commodity stocks as they lead the market. Indeed, if the dollar is going to break higher, stocks such as AAPL, RIMM, machinery, industrial, etc. will need to step up in the place of those stocks that have feasted off a weaker dollar (metals, energy).
Often the Monday following expiration will trade opposite of expiration, and we will look at that as an opportunity to work into some stocks that gapped away from us or simply pullback from good moves to provide a good buy point. That said, DJ30 put in 600 points last week, 135 on NASDAQ. Soft start or not to the new week and it won't take much before the indices need a rest once more.
The rally thus far has seen 4 to 5 session runs, then an equal pullback. With earnings coming out each session there is the potential for day to day volatility. Thus far the market's emerging strength has carried it, and there is not a lot to indicate that is going to change in the near term outside of big surprise. The market has shown resilience in the face of adversity, and we anticipate it continuing this course given the solid leadership. That means we will continue to be opportunistic and take positions as they present themselves and also take gain as stocks make good rips higher as we did on the strong moves to end last week.
Support and Resistance
NASDAQ: Closed at 2402.97
Resistance:
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 200 day SMA at 2538
Support:
2392 is the April 2008 peak
2386 is the August intraday low
2379 from the October 2006 peak
2378 is the mid-February peak
2370 from the April 2006 peak
2340 from the March 2007 low
The 50 day EMA at 2333
2294 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2261 is late March higher low
2252 is the early February low
2221 is March low
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak
2168 is the March 2008 low
S&P 500: Closed at 1390.33
Resistance:
1396 is the February 2008 peak
1406 is the August and November 2007 closing low
1420 is a longer term trendline from the August 2003/September 2004 lows
1433 from a pair of August 2007 lows and December mid-month intraday low
The 200 day SMA at 1440
Support:
1387 is the April 2008 intraday high
The 90 day SMA at 1373
1374 is the March 2007 closing low
1370 is the August 2007 intraday low
The 50 day EMA at 1353
1325 from May 2006 peak prior to the summer 2006 correction
1325 is an ancient trendline
1317 is the early February low
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1294 from the January 2006 peak
1288 from June 2006
1280 from June and August 2006
1272.66 is the March 2008 low
Dow: Closed at 12,849.36
Resistance:
13,092 is the December 2007 intraday low
The 200 day SMA at 13,095
13,563 is the late December peak
13,780 is the early December 2007 peak
Support:
12,845 is the August closing low
12,786 is the February 2007 peak
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,743 is the November low
The 90 day SMA at 12,581
12,573 is the mid-February high
12,518 is the August intraday low
The 50 day EMA at 12,471
12,250 from late March 2007 lows
12,070 from the early February 2008 lows
12,050 from the March 2007
11,731 is the March 2008 low
11,670 is the May 2006 intraday high; 11,642 closing
11,634 is the January intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 22
- Existing Home Sales, March (10:00): 4.95M expected, 5.03M prior
April 23
- Crude oil inventories (10:30): -2.35M prior
April 24
- Durable goods orders, March (8:30): 0.1% actual versus -1.7% prior
- Initial jobless claims (8:30): 372K prior
- New home sales, March (10:00): 585K expected, 590K prior
April 25
- Michigan sentiment, April revised (10:00): 64.2 expected, 63.2 prior |
